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Another Blow for Trump’s Tax-Cut 'Pay Hike'

Joshua Roberts

By Michael Rainey

November 9, 2017

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A big selling point for the GOP tax plan is the Trump administration’s claim that middle-class incomes will see a sizable boost as a result of the proposed corporate tax cut, with average households receiving "pay hikes" of between $4,000 and $9,000 a year.

Most economists have greeted those numbers from the president’s Council of Economic Advisers with no small degree of skepticism, and the ensuing debate has generated heated words among a handful of leading economists. Now a new analysis by William R. Cline of the Peterson Institute of International Economics finds that the economic argument for corporate tax cuts driving wages higher has little historical support.

“Although there was a large cut in the statutory corporate tax rate, from about 50 percent in the 1960s and 1970s to about 35 percent in 1988 and after, there was little, if any, evident response in the rate of business investment,” Cline writes. Not only was there little growth, but investment in capital stock actually fell in the 1980s and 1990s, despite the tax cuts.

Cline says there are other problems — including the fact that the corporate tax applies to only part of the economy and that most businesses already pay far less than 35 percent on their taxes — that serve to limit the strength and scope of the administration’s argument.

Taken together, he says, the data suggest that “the wage gains from cutting the corporate tax to 20 percent are only about one-fourth as large as even the lower end of the range estimated by the CEA. Moreover, the failure of investment and wages to rise after the last major episode of corporate tax cuts in the late 1980s suggests the wage gains could be even lower.”